Unless we see some new legislation passed in Congress the estate tax exclusion in 2011 is just $1 million, and this is profound in light of the fact that it was $3.5 million in 2009 before the repeal that was in effect in 2010. So this is leaving a lot more estates vulnerable to the tax, and the top rate is 55% so this federal levy is certainly something to be avoided.
One way to reduce the value of your estate in an effort to avoid estate tax exposure is through the giving of tax-free gifts. There is a lifetime gift tax exclusion of $1 million so you can give a single gift of $1 million or multiple gifts throughout your lifetime equaling as much as $1 million free of the gift tax. But in addition to this lifetime exclusion there is also a $13,000 per person annual exemption. So you can give gifts that are worth up to $13,000 to as many recipients as you want to tax-free each year, and your spouse can do the same. So if you are married you and your partner can combine your annual exemptions and give gifts totaling as much as $26,000 every year to an unlimited number of people.
If you plan ahead carefully you can use the annual gift tax exemption to transfer assets to your heirs in a tax-free manner and reduce the overall value of your estate for estate tax purposes while doing it. Though this is a simple and effective estate planning strategy that will help you gain tax efficiency there is a very special opportunity that goes along with it. The suggestion here is to get creative and really enjoy the act of giving. You don’t have to give cash; you can give your heir a 1967 Volkswagen or a baseball glove that was worn by George Brett. If you use your imagination you can have a lot of fun giving creatively while reducing your tax liability in the process.